President Trump is giving me whiplash on the issue of whether the administration is considering a payroll tax cut in an attempt to prevent a recession.
White House officials denied the report only to have Trump admit that the tax break was under consideration.
“Payroll tax is something that we think about, and a lot of people would like to see that, and that very much affects the workers of our country,” Trump said Tuesday during an exchange with reporters at the White House.
A day later, the president flip-flopped.
“We are not looking at a payroll tax cut now,” Trump said Wednesday while answering questions from reporters before heading to Kentucky.
Although Trump has been enthusiastically boasting about the strength of the economy, even talk of a payroll tax cut signals the administration is worried about a downturn.
But you can’t fault officials for examining various responses to a recession. They should be preparing for a worst-case scenario.
However, here’s my concern: Recession or not, diverting money from Social Security is a bad move.
Social Security is financed through a dedicated payroll tax. Employees pay 6.2 percent of their income. Employers pay an additional 6.2 percent. The self-employed pay 12.4 percent. The tax does have a cap. The maximum wage as of 2019 that’s subject to the tax is $132,900.
Payroll taxes fund Social Security, which is the main source of income for millions of seniors. Fifty-seven percent of retirees rely on Social Security as their primary source of income, according to a 2018 Gallup poll.
Social Security is in serious financial trouble.
“The Social Security Trust Fund is not capable of handling the future distributions it needs to make,” said Steve Gill, a professor of accounting and taxation at San Diego State University. “It doesn’t make sense to cut the revenue source that feeds the trust fund.”
The two programs that make up Social Security will only have enough money coming in by 2035 to pay 80 percent of benefits. Without a fix, the Old-Age and Survivors Insurance Trust Fund (OASI), which pays retirement and survivor benefits, will have just enough continuing tax income to pay out 77 percent of scheduled payments by 2034. The second Social Security program, the Disability Trust Fund, which pays disability benefits, is in better shape. Still, that fund will only have enough money coming in to cover 91 percent of scheduled benefits when its reserves are depleted in 2052.
In the short-term, a payroll tax does have the effect of boosting the economy because workers generally spend the money, according to Gill. So in a recession, a payroll tax cut can make sense. But there’s a cost.
The government may have to increase the payroll tax later, lower Social Security benefits or increase borrowing to cover a shortfall in Social Security funding, Gill said.
“Payroll taxes are the revenue source that funds Social Security benefits for future retirees,” Gill said. “By reducing the revenue source for a program that is already running without adequate funding you’re simply cashing a check and expecting future taxpayers to cover the bill. Although a payroll tax cut will provide short-term stimulus to the economy, it is unlikely to provide long-term growth and as such it adds to the national debt. Given the current rate of growth of our national debt, this does not seem like a good time to add more.”
It’s not that a cut in the payroll tax hasn’t been used before to stimulate the economy. There was one in calendar years 2011 and 2012. It reduced the employee payroll tax from 6.2 percent to 4.2 percent. The payroll tax rate for self-employed workers was dropped to 10.4 percent. The rate for employers stayed the same at 6.2 percent. The tax break ended in 2013, returning to the 6.2 percent limit.
To make up for the payroll tax cuts in 2011 and 2012, the government transferred money to the Social Security Trust Funds from general revenue to make the funds whole, according to Kathleen Romig, a senior policy analyst for the Center on Budget and Policy Priorities.
However, any proposed payroll tax cut would have to come with an assurance once again that the Social Security Trust Funds would be made whole, otherwise “the loss of that revenue would worsen Social Security’s finances and hasten the depletion of the trust funds,” Romig said.
“In 2011 and 2012, policymakers cut the employee-side Social Security payroll tax by 2 percentage points for two years. Enacting the same policy for 2020 and 2021 would cost nearly $300 billion before interest,” the Committee for a Responsible Federal Budget said in a blog post this week. “Lawmakers would need to decide whether the lost revenue would mean less money for the Treasury or less revenue into the Social Security Trust Fund.”
Trump may have squashed talks about a possible payroll tax cut, and that’s a good thing. Still: When will the administration and Congress get around to fixing Social Security? A recession is not a sure thing in the near future. But a shortfall in Social Security is definitely coming.
Read more:
Color of Money Question of the Week
What do you think of the idea of cutting the payroll tax to ward off a recession? Send your comments to colorofmoney@washpost.com. Please include your name, city and state. In the subject line put “Payroll Tax.”
Live Chat Today
Join me today at noon (Eastern time) for a live discussion about your money.
To participate in this week’s discussion or read the transcript after it’s over, click this link.
I’m live every Thursday from noon to 1 p.m. (Eastern time).
Recession warning
There has been a lot of discussion about the possibility of a recession.
Last week I asked: If a recession is coming, are you worried?
Tom Irvine of Lewes, Delaware wrote, “No, we are not worried about recession danger. Recessions happen. In retirement, asset allocation is key. We have, in our late 60s, our market assets at 55 percent equities and 45 percent government bonds and total bond funds. We always have at least three to four years of T-bill ladders available so we never have to sell stocks or bond funds. As we get older, we will add to the equity percentage if we do not get hammered in the initial ten years of retirement. This is a comfortable plan to deal with the long term and any short-term downturns.”
“I find myself becoming more apprehensive and anxious about having a decent income when I retire, and at this point, things don’t look so good,” wrote an 80-year-old reader from California, who is still working.
LA Rosen from Philadelphia wrote, “I have learned from past major downturns in the market to buy after the ‘crashes’ and, as best as possible, protect profits during times of volatility. This is especially true for those in or nearing retirement, who cannot wait out the long climb out of the next, inevitable recession.
“I am in my late 50s but still working. Most of my money is invested in the stock market but to prepare for the recession that I believe is eventually coming, I made the following adjustments: I reallocated the balances in my 401(k) from growth to conservative but kept the allocation for new investments aggressively as growth so that I can purchase more shares as the stock prices trend lower.”
Color of Money Columns This Week
Knowledge isn’t power. The right knowledge is power.
Stay informed about your money.
In addition to this newsletter, please read and share my weekly personal finance columns.
Newsletter Comments Policy
Please note it is my personal policy to identify readers who respond to questions I ask in my newsletters. I find it encourages thoughtful and civil conversation. I want my newsletters to be a safe place to express your opinion. On sensitive matters or upon request, I’m happy to include just your first name and/or initials. But I prefer not to post anonymous comments (I do make exceptions when I’m asking questions that might reveal sensitive information or cause conflict with family or friends.)
Have a question about your finances? Michelle Singletary has a weekly live chat every Thursday at noon where she discusses financial dilemmas with readers.
You can also write to Michelle directly by sending an email to michelle.singletary@washpost.com. Personal responses may not be possible, and comments or questions may be used in a future column, with the writer’s name, unless otherwise requested.
To read more Color of Money columns, go here.
If you’re viewing this post online, sign up to automatically receive Michelle Singletary’s newsletters right into your email box: “Your Retirement” on Mondays and “Personal Finance” on Thursdays.
Follow Michelle Singletary on Twitter @SingletaryM and Facebook.